2016 State of the Budget April 14, 2016 Good evening Alaskans. I’m Governor Bill Walker. I am addressing you tonight from Juneau during the closing days of the regular legislative session. I want to talk about where we are, what we need to do, and the exciting part – what we’re going to do when we’re done with this phase. I come from a building background and I’m an ultimate optimist. I have a vision for Alaska that’s very different from where we are right now—a vision where we’re not worried about balancing the budget, or what the price of oil is today; an Alaska that is not tied to the roller coaster kind of economy we have seen so many times before. The good news is we have a plan to accomplish that. When I came into office, the price of oil started dropping like a rock—a 51 percent drop in 81 days. It was unprecedented. In the last two years, Alaska lost three-quarters of our income. Two years ago the deficit was $1.6 billion. Now it is $4 billion. It’s just not sustainable. You can’t run a business this way, you can’t run a family this way and you certainly can’t run a government this way. If we don’t fix the problem now, we’ll face much bigger problems in the coming years. Here are a few examples of what happens if we don’t take care of this problem now: The permanent fund dividend goes to zero in less than four years. We will drain our savings accounts. Our bond rating will continue to drop. It will be more expensive to build things. Investors will lose confidence in Alaska. During this time of fiscal uncertainty, the enemy is not the price of oil. It’s not government. It’s not the oil industry. The enemy is the lack of a plan. We began working on a plan by bringing together hundreds of Alaskans in June last year at the University of Alaska Fairbanks to discuss the problem. We then reached out to thousands of Alaskans online and in town hall meetings all across the state. We took what we learned from Alaskans over those many months and began working on a plan. After months of fine-tuning, we submitted the plan to the legislature during the first days of this session. The plan has three parts: Spending reductions 2. An annual sustainable draw from the permanent fund earnings 3. Additional revenues First, we cut: Together with legislators, we cut more than a billion dollars from state spending since I took office. In fact, overall spending has fallen from $8 billion in 2013 to about $4.7 billion for 2017. That’s a drop of 40 percent in four years. Since I took office, we’ve implemented travel and hiring freezes. We are combining some agencies and working to streamline services in others. We’re also making some painful cuts to senior services. We have reduced funding for state troopers and the university – among many others. Capital spending is down to minimum, largely to provide matching dollars for federal funding of Alaska projects. But, as the late Governor Wally Hickel said, you cannot cut your way to prosperity. The process to reduce spending will continue. Part two of the plan: A sustainable draw from the Permanent Fund earnings. As I’ve often said, Alaska doesn’t have a wealth problem; we have a cash flow problem. We need to manage our wealth in such a way as to solve our cash flow problem. This last year, we made more money off our wealth than we did off our resource development. Our wealth is now our biggest asset. We need to take the volatility of oil out of our annual budgeting. That’s the problem. If a working couple said, ‘Let’s take our salaries, put them in a 401K and then let’s pick a commodity and live off that commodity’s earnings’—that’s very hard to do. That’s sort of what we’ve done in Alaska. We are trying to live 90 percent off the single commodity of oil. That’s why I introduced the Permanent Fund Protection Act. Instead of budgeting based on the roller coaster of oil prices, we need a more stable source of revenue. A sustainable draw from a portion of the earnings of the Permanent Fund creates that stability. My proposal also provides for ongoing permanent fund dividends for Alaskans. The dividend would be set at $1,000 next year, which is close to the average check since the dividend program started. If we do nothing, we’re on a course to drain our savings in less than two years. After that, the PFDs are at risk, and then the body of the permanent fund itself will be at risk. That’s why we call our bill the Permanent Fund Protection Act—to keep the Permanent Fund permanent. Spending cuts and the Permanent Fund Protection Act will get us a long way toward closing the budget gap. But we also need part three of the plan: new revenues. I personally dislike any form of taxes or any changes to the PFD. But this isn’t about what I like or what I am politically comfortable with. It’s about what’s best for Alaska. Changes to our tax structure will ensure that everyone contributes to the solution—Alaskans, non-resident workers and all industries. My goal was to be fair so no one group or sector of Alaska carries too heavy a load. A new analysis this week found again that Alaskans have the lowest individual tax burden in the nation. We are the only state where residents pay no state income or sales taxes. We are also the only state where residents get an annual dividend. The measures I have proposed include an increase to the motor fuel tax. Alaska’s motor fuel tax is lowest in the nation. It hasn’t been changed in 45 years – since John F. Kennedy was president. I’m proposing a modest income tax pegged to the federal income tax: A married couple with two children earning $50,000 would pay about $15 a year. A married couple with no children earning $50,000 would pay about $200 a year. State income taxes are deductible from federal taxes. This brings tax dollars paid to the federal government by Alaskan taxpayers back to Alaska. Out-of-state workers take $2.6 billion dollars in wages out of Alaska each year. Many of them pay income taxes on their Alaska earnings in other states because it’s not taxed in Alaska. An Alaska income tax welcomes those nonresident workers to contribute to the solution. We considered sales taxes versus income taxes. It was a close call for us but we chose income taxes over sales taxes for several reasons. First, a number of local governments in Alaska already have their own sales taxes in place. We were concerned about the effects of stacking a state sales tax on top of a local sales tax. And in some rural areas, the price of a gallon of milk can be double what it is in other areas. That means some Alaskans would pay twice as much sales tax for the same gallon of milk. I’ve proposed increases to alcohol and tobacco taxes. These increases will help offset the impacts to the state from alcohol and tobacco use. We see the costs, especially in our health care budget, public safety budget, and corrections budget. I’ve also proposed oil tax reform. We are currently upside down in our oil tax credits. We’re paying out more in credits and deductions than we’re receiving in production taxes. That’s not smart, and it’s not sustainable. We just can’t afford it anymore. I’ve proposed changes that would continue to provide incentives to the oil industry and protect Alaska’s treasury. My plan also calls for adjustments to commercial fishing taxes, and mining taxes. If all of these revenue sources are implemented, we will be the state with the second lowest individual taxes in the nation. And we will be the only state where residents receive annual dividend checks. Over the past few months, I have made community presentations in Fairbanks, the Mat-Su, Anchorage, Kenai and Southeast. I was encouraged to hear from Alaskans at each of those presentations that they are willing to contribute to help fix the problem now. Burning through our savings at a rate of $4 billion a year is not a solution. That’s like burning the roof rafters to stay warm. It works for a little while, but it’s not a very good plan. At the start of the legislative session I submitted to the legislature the complete New Sustainable Alaska Plan to fix our $4 billion dollar deficit. I told legislators the plan is written in pencil, not pen. If they pass a plan that is fair, sustainable and puts Alaska on a clear path for a balanced budget and sustainable future, I will sign it. But we must act this year. If implemented this year, Alaska would have a balanced and sustainable budget in 2019. Some have said the decisions to implement the sustainable budget plan are too hard. These may be politically uncomfortable decisions but they are not hard. What’s hard is the number of families who have to choose between paying their mortgages and paying their heating bills. What’s hard is when our emergency room doctors see five young people die in five days of heroin overdoses. What’s hard is losing our young people to suicide because of a lack of hope. That’s hard. Yes, the budget issues before us may require politically uncomfortable decisions, but they are also fiscally responsible decisions. There are just a few days left in the legislative session. We as Alaskans can fix this problem if we act now. I call this the ‘Fix Alaska’ session. Next year, I want to build Alaska. It is time to finally diversify our economy. We need to expand our agricultural opportunities in Alaska. We have many infrastructure projects to build, such as a gasline, underpinned financially by the Asian LNG markets. We have many capital projects across this state that need to be finished to create economic opportunity here in Alaska. We can’t expect companies to invest in Alaska if we haven’t fixed our fiscal problem. Can you imagine if, in your personal life, you had lost three-quarters of your income and were drawing down on your personal savings to get by—and then going into a local bank to apply for a loan to buy a house? That is what we are doing as a state. We need to close the fiscal gap and we need to do it now. I want our children to get the education they need for a successful future. And I want to make sure there are jobs and opportunities for decades to come. The worst export from Alaska is our children leaving home to go elsewhere to find a job and career. So let’s get rid of this cloud of uncertainty hovering over our great state. Let’s not drag it along over us for years. This is only a crisis if we fail to act. There are enough pieces to the New Sustainable Alaska Plan for everyone to find something they don’t like. There are parts of the plan I don’t like. However, I am willing to take the criticism for each piece of the plan that some may dislike. As I have said before, I did not run for governor to make decisions to ensure I was keeping this job, I ran for governor to do the job. Thank you, Alaskans, for becoming involved in this discussion. Please let your legislators know it is OK to make the politically tough decisions this session to fix Alaska. It will take all of us, pulling together, to build a strong foundation for the future. Thank you. Good night, and may God bless Alaska.